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Funds from cradle to grave
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June 14, 2001: 9:02 a.m. ET
A mutual fund roadmap to take you through to the golden years
By Staff Writer Parija Bhatnagar
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NEW YORK (CNNfn) - If anyone has ever asked you to single out the most important events of your life, you probably mentioned college graduation, marriage, or the birth of a child. They're some of life's most precious milestones.
But financial planners say people often aren't prepared for these big life benchmarks, and fail to pick the right investments along the way to fit their needs.
So here is a roadmap for picking mutual funds whether you're just getting started, newly married, saving for a home, having a baby or getting ready to retire.
Funds for young people getting started
Typically, people in their 20s have a long investing horizon and should be more aggressive with their portfolios, experts say. Many financial pros say young people can put 100 percent of their money into stocks without fear since they'll have decades until they need the money.
The first step is to figure out the right asset allocation that fits your needs.
Karen Altfest, a certified financial planner in New York, said young investors should make sure their funds have good managers and strong track records. They should also make sure their portfolios are diversified with a mix of small- mid- and large-cap stocks and some international stocks.
"People in their 20s have a lot of time to grow their investments and don't need to be too conservative," Altfest said.
A solid place to start is with a total stock market index fund like Vanguard Total Stock Market, financial pros say. The more aggressive-minded could opt for a sector fund or even a technology fund.
But for the 20-somethings who don't want to think about investing, life strategy funds may be a good alternative, said Alan Papier, an analyst at Chicago fund-tracker Morningstar.
"These funds act as an asset allocator for investors who want to take a hands-off approach," Papier said.
The life strategy type funds start more aggressively, with up to 80 percent stocks. The funds get less aggressive as you get older with more bond exposure.
Papier favors Vanguard Life Strategy Growth (VASGX: Research, Estimates) , Deutsche Flag Value Builder (FLVBX: Research, Estimates), Gabelli Westwood Balanced (WEBAX: Research, Estimates), and Vanguard Wellington (VWELX: Research, Estimates) .
Twentysomethings will also be facing choices with their retirement plans at their new jobs. Savings plans like 401(k)s, 403(b)s and IRAs offer you a "protective shelf" for your money, said Wayne Bogosian, co-author of "The Complete Idiot's Guide to 401(k) plans."
The sooner you start putting away a portion of your paycheck into company-provided plans, the sooner you can make your money work for you. If you haven't yet signed up for a 401(k) because you don't know how to pick funds for your portfolio, you are missing out on free money from a company match on your investment.
Click here for more tips about making the most of your 401(k).
Bogosian said you can build a portfolio around an S&P 500 index fund and then add large-, mid- and small-cap growth and value funds as well as international funds.
"If you do that and rebalance your portfolio each year, you would have one that could last throughout your career," Bogosian said.
Experts advise to always max out your retirement contributions if you can.
Mutual funds for a new couple
It's rare to find a husband and wife who agree about money, so often they'll have to make compromises when it comes to picking investments.
A couple should try to establish realistic goals together and strive for a common ground, such as forgoing a summer vacation to build up savings, say experts. For example, if a couple decides to splurge on a new car, they need to understand how that might affect plans for other long-term goals.
"We try to bridge the different investment styles to make it more comfortable for the person that's more risk averse, said Edith Barschi, a certified financial planner from Berkeley, Calif.
"For example, if one of the spouses likes to play the market and they have a fairly large portfolio, we give a certain percentage to the spouse to do that, and part of it will be in safe investments. That way, we don't make one of the spouse feel left out but also honor the discomfort of the safer spouse."
And if there's no compromise to be had, the solution is pretty simple. Barschi suggests the couple avoid combining their finances and maintain separate accounts.
Click here for more money tips for newlyweds.
Barschi likes to recommend Artisan International for international exposure for young couples.
Altfest suggested Royce Opportunity, because manager Boniface Zaino has had strong results on Wall Street. The fund, with $513 in assets, earned 20 percent in 2000 when most parts of the market were under water. She also likes Tweedy, Browne Global Value, and Longleaf Partners.
Once you hit your 30s, it will be time to take a closer look at bonds, said Gryzmala.
"Once you pass 35 or even 40, start bringing bonds into the portfolio because they reduce the volatility of the portfolio and also provide an income stream," Gryzmala said.
Grzymala likes funds such as PIMCO Total Return, Vanguard Total Bond Index Fund, and Fremont Bond Fund.
Click here for a look at how funds are doing this year.
Altfest suggest couples also consider real estate funds for extra diversification.
Mutual funds to save for a home
Think about starting a separate savings pool for each important goal—either a savings account or a money market account—and add the same each month from the paycheck to accumulate over time.
"If you're planning to buy a house, you need to be much more conservative than when you're investing in a retirement plan, because you are going to need cash for the down payment," said Barschi.
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Consider a low-risk savings option for financing the new home.(FILE) | |
Consider a higher yielding, relatively liquid investment so that cash is available, Barschi said.
Short-term bonds also provide a low-risk option. For example, Strong Advantage has low volatility and has a five-year annualized return of about 6.85 percent, said Tom Gryzmala, a certified financial planner from Alexandria, Va.
Bogosian favors a Roth IRA to save for a first home. With a Roth, you can withdraw up to $10,000 towards the purchase of a home before age 59-1/2 without penalty. It applies to anyone who hasn't owned a home in two years, and the lifetime limit is $10,000.
Baby's on the way
If you're thinking about starting the family, it's also likely that you've given a lot of thought about how you're going to finance the children's education
The savings options include education IRAs and the state-sponsored 529 plan.
Some experts have new-found enthusiasm for the 529 plan after President Bush signed his tax cut into law last week.
In the past you could put large sums of money into a tax-deferred 529 plan for the child's college tuition. When withdrawn, the money was taxed at the child's income tax rate. But under the new law, withdrawals will be tax free. It will also be easier to transfer assets from one tax-deferred plan to another, or to another relative.
"It's like getting a Roth IRA for college education," said Barschi.
The new changes also raise the contribution limit for education IRAs to $2,000 from an earlier $500.
As a general rule, Gryzmala advises couples with kids to invest aggressively while they are under 10, moderately when they cross 10, and for the last two years before they go off to college, have no money in stocks.
"That's a way to protect it from being subjected to a market downturn like we're experiencing now (with market volatility)," Grzymala said.
Getting ready to retire
When you're getting ready to stop working and dip into the nest egg, you'll have to back down on aggressive investments. That will mean raising your stake in bonds.
When you're five years from retirement you'll need to make the final adjustments to your portfolio, Grzymala said.
Click here for some great funds for retirement.
Among his top picks are Thornburg Value, a large blend fund that looks for undervalued stocks with a five-year annualized return of 21.59 percent, according to Morningstar. Grzymala also likes Dreyfus Appreciation, another large blend fund with a good long-term record that likes to hold reliable blue chip stocks.
Grzymala recommends Excelsior Value & Restructuring, which invests in companies that are streamlining their businesses, Morningstar said. Other picks include Weitz Value, Longleaf Partners and Strong Advantage.
"Review the manager's performance constantly," Grzymala said. "Your fund could be in the top 30 percent one year and end up at the bottom the next." 
* Disclaimer
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